Netflix-Qwikster Split: It’s the Licensing, Silly

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Netflix-Qwikster Split: It’s the Licensing, Silly

Over 24 hours after Netflix CEO Reed Hastings stunned the technology chattering classes with his decision to spin its DVD shipping business off from its streaming business, observers are still questioning it.

Nobody seems to know why Netflix would split its company into Qwikster, which will deliver DVDs slowly through the mail, and Netflix, which will stream movies quickly over the internet.

Evolver.fm covers digital music, of course, but we can’t help weighing in on this decision because the reason behind it seems so obvious from where we’re sitting, covering the music industry, including its licensing intricacies.

Netflix is all over the news again today, and people still seem confused about why it would split streaming from DVD shipping.

[partner id="evolverfm"]Anyone who uses Netflix should understand the fundamental difference between Netflix the DVD service and Netflix the streaming service: The DVD section has a better selection, with newer releases. The reason for this: Movie studios have a striated approach to licensing. They sell the same movies over and over in different ways, at different prices, to theaters, DVD rental companies, on-demand cable, pay TV, basic cable, online streaming services, airlines, basic cable, and free TV.

The people who own movie copyrights already treat Netflix’s DVD and streaming businesses separately, and have done so for years. We weren’t in the room when these deals were struck, but given Netflix’s surprising decision, it seems clear that the movie studios were using one as a bargaining chip against the other. Basically: “We’ll give you X on DVD if you accept not having Y on a stream until Z date.”

From Netflix’s point of view, the decision to split its streaming and DVD-shipping businesses into separate companies, with no ties to each other appears to be about allowing them to negotiate rights and release windows independently. No longer will the movie studios be able to use leverage in one area against the other, and this is especially important in light of current and future competition against Netflix’s streaming business from the likes of Apple, Google, Amazon, Microsoft and others.

Hasting hints at this reasoning in his widely-analyzed blog post, but of course doesn’t want to pin blame directly on the studios, which provide the lifeblood for both businesses:

Some members will likely feel that we shouldn’t split the businesses, and that we shouldn’t rename our DVD by mail service. Our view is with this split of the businesses, we will be better at streaming, and we will be better at DVD by mail. It is possible we are moving too fast – it is hard to say. But going forward, Qwikster will continue to run the best DVD by mail service ever, throughout the United States. Netflix will offer the best streaming service for TV shows and movies, hopefully on a global basis. The __additional streaming content we have coming in the next few months is substantial, and we are always working to improve our service further __[our emphasis].

For all of the confusion about why Netflix CEO Reed Hastings would raise subscription rates and then split his company in two, there appears to be remarkably little clarity surrounding the reason for this decision, which seems obvious to anyone who has spent years covering the music industry: It’s about the licensing, silly.